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MacIntyre: Institutions and Investors

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MacIntyre. 2001. Institutions and Investors: The Politics of the Economic Crisis in Southeast Asia. International Organization 55 (1): 81-122.

Variables and Hypotheses

In the Asian financial crisis, the investment reversal (Y) was bigger in some countries than in others. Political institutions (X) explain this divergence, specifically "the distribution of veto authority." This distribution places states' policy postures on a continuum between rigidity and volatility--and both extremes are very bad for investors. Wider distribution of veto authority leads to greater risk of rigidity, and tighter concentration of veto authority leads to greater risk of volatility. Thus, there is a u-shaped relationship between the number of veto players (X) and policy risk for investors (Y); Figure 4 (p 94) places this study's four cases on this u-curve.


So how do veto players affect capital flight? "Regardless of the initial conditions in a given country or in the international economy, governments can make the situation better or worse for investors" (82). Policy is the intervening variable between institutions and investor panic. This article takes an institutional approach, showing that regimes with policy rigidity or volatility had the most problems. Thus:

Institutional framework --> policy posture (rigid vs volatile) --> investment (see page 84).

Other things matter too, but he ignores them here--he admittedly pursues a partial argument, demonstrating only that the variable of concern to him matters.

A Tradeoff between Credibility and Flexibility

  1. Policy CREDIBILITY: commitments and the importance of policy stability for investors; (North:) When government is institutionally constrained, a more stable and predictable policy environment exists for investors; if it is not constrained, it cannot be trusted. Downside: could lead to policy RIGIDITY (cannot respond fast enough in times of crisis)
  2. Policy FLEXIBILITY: governmental adaptability and the importance of policy flexibility for the purposes of economic reform; Flexibility in policymaking and economic reform can be crucial to making an unattractive investment environment more attractive and preventing an attractive one from losing its appeal. Downside: could lead to policy VOLATILITY (loses credibility to investors)

The Veto Players Approach

The author uses George Tsebelis' veto player framework: As the number of veto players increases, policy stability also increases. Having more than one veto player helps to reduce the likelihood of policy volatility, but there is some point of inflexion after which additional veto players become unwelcome, serving only to increase the likelihood of policy rigidity. The fewer the veto players, the greater the risk to investors of policy volatility; the greater the number of veto players, the greater the risk to investors of policy rigidity. Therefore, this relationship is represented in more of a U-shaped curve rather than a linear function. See figure 3 on pg. 89.


See figure 4 on page 94. A "most similar" design, using four SE Asian countries that were similar in important ways but had varying distributions of veto authority and varying levels of investment flight (see page 82 for case selection).

Thailand: policy rigidity led to worsening of crisis

With the onset of the crisis, there was too much political interference. There were at least six veto players who had fragmented control over policy. This enhanced the government's inability to deliver necessary policy adjustments, which scared investors.

The Philippines: intermediate case (institutional checks against policy volatility but sufficient scope for flexible executive action)

The steady and coherent policy response of the Philippine government helped it to avoid a substantially worse investment reversal. The administration showed relative coherence and consistency of policy management. With only three veto players, timely policy adjustment was possible. The constraints on executive action from the legislature and the judiciary were sufficient to preclude the possibility of radical policy volatility--the syndrome we observe in Malaysia and Indonesia. Alone among the four cases, the Philippines did not see its credit rating fall sharply during the crisis--its rating, instead, held steady.

Malaysia: policy volatility leads to failure

Having only one veto player made strong surges in one policy direction and then the other and then back again possible (volatility). Malaysia's institutional framework was very permissive of flexible policy action--strong action in any direction. This led to investor insecurity and the worsening of the crisis.

Indonesia: policy volatility to the extreme lead to disaster

Although both the House and the President had veto power, the centralization of power on the President has led to his sole decision making power in the matter of the crisis. He has changed his policy choices almost daily, leading to severe policy volatility, which for investors became intolerable. With policy signals fluctuating so wildly and with there being no institutional mechanism for the government to make credible policy commitments, there was a rapid and total collapse in investment. Investors had no basis for predicting government policy nor for trusting government promises. Exit was the only reasonable option.


A heavy concentration of veto authority, especially in a weakly democratic or authoritarian context, produces an inherent risk of policy volatility. A wide dispersal of veto authority produces an inherent risk of policy rigidity. Intermediate configurations make policy sticky but leave some room for adjustment. The institutional framework alone is not a sufficient factor to explain the diverse outcomes, but it is a necessary factor. Institutions do not drive policy, but they do impose parameters on what is possible.